OSI buyout down but not out

A second vote of shareholders is planned after the first falls short.

A bid to take OSI Restaurant Partners private sustained an embarrassing blow Tuesday when a shareholder vote to approve a $3.2-billion buyout offer fell short of the required majority.

The setback was not necessarily fatal. Stunned investors at what was expected to be the Tampa company's last public meeting were told to reconvene May 15, when a second tally will be conducted. OSI, the parent company of such chains as Outback Steakhouse and Carrabba's Italian Grill, said it will use the extra time to drum up more "Yes" votes.

But the temporary defeat came at a time when institutional opposition to the $40-per-share offer appeared to be waning. And it probably did little for morale among the hundreds of store-level managers who are in Nashville for Outback's annual partnership meeting.

What went wrong? Bain Capital Partners, the Boston-based private-equity firm that is leading the buyout offer, declined to comment Tuesday. So did OSI, other than a bare-bones news release it issued and an internal memo from chief executive Bill Allen, telling staff he looked forward to the deal's "successful completion." He did not say how many more votes OSI needs to win majority approval.

Shareholders and industry analysts offered a variety of explanations Tuesday. Bob Derrington, an analyst with the Morgan & Keeling investment bank in Memphis, said that recent improvements in OSI's financial performance may have undermined the company's own, more dire forecasts. "We're not surprised that there's a faction that would like to get more than $40 per share, " he said.

Howard Hansen, a portfolio manager whose New Jersey employer, Lord Abbett & Co., is OSI's second-largest shareholder at 6.95 percent, said the $40-per-share buyout price has the markings of a "panic sale." Hansen said the figure is partly based on projected earnings that ignore an anticipated rebound at Outback. He also said he thinks OSI's earnings woes are in part temporary, due to an industrywide downturn he called "cyclical."

Hansen gave little credence to a recent endorsement of the deal by an influential proxy-advice company. He said Institutional Shareholder Services is known for its ability to assess the strength of a corporate governance or executive compensation plan, not its market value.

To be sure, OSI is not the only company to postpone a buyout-related shareholder vote lately. Radio giant Clear Channel Communications did so this week; Tampa's Reptron Electronics and clothing retailer Eddie Bauer also postponed votes in February. Reptron's buyout deal ultimately won approval but Bauer's fell short.

One reason for the trend is that hedge funds and even traditional mutual fund companies have become tougher, and more vocal, critics of deals they don't like, said Chris Young, Institutional Shareholder Services' director of mergers-and-acquisitions research. Their vehemence may also reflect a backlash against private-equity companies, which are seen as paying bargain prices for companies from which they quickly extract enormous profits. "You're getting shareholders saying ... 'Let's take some of the steps that private equity companies would have, and maybe we could see a higher stock price within a year, ' " he said.

Whether OSI will muster enough shareholder votes at next week's meeting remains to be seen. If it fails, the management-led acquisition team that includes Bain and Catterton Partners could decide to raise their per-share offer or to abandon the deal entirely.

OSI, the Tampa parent of Outback Steakhouse and seven other chains, has rescheduled for May 15 a shareholder vote to sell the company. If OSI fails to garner majority support, its would-be acquirers might improve their offer or pull out.